Doi: 10. 1016/S1751-3243(07)03003-9 Conceptual Foundations of the Balanced Scorecard

Conceptual Foundations of the Balanced Scorecard
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which this chapter was written. Intensive and continual collaboration with innovating companies, public sector agencies and non-profi t organizations have informed the enhancements and capabilities of the original balanced scorecard. Among these advances are the following
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strategy maps of strategic objectives
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extending the concept to non-profi t and public sector enterprises measurement of strategic readiness of intangible assets
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role for executive leadership
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creating synergies through alignment of business and support units to corporate strategy
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using communication to create intrinsic motivation
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deploying extrinsic motivation by aligning employees personal objectives and compensation to strategic objectives
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linking strategy and operations in anew closed-loop management system
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creating the of ce of strategy management.
It’s not easy to respond when questioned about what happens next. While each of these advances was a logical extension of previous work, each presented itself incrementally and opportunistically, not as part of a planned evolution of the concept over a year period. While acknowledging a cloudy crystal ball, I can see several big opportunities for future work.
First, the early adopters of the BSC (Rockwater, FMC, Mobil, Chemical Bank, Cigna PC, AT
& T Canada, Wells Fargo Online Services, and the City of Charlotte) had superb leaders. Initially, perhaps, we took such leadership for granted. Subsequent experience revealed that when the balanced scorecard failed in organizations, we could usually trace the roots of failure back to lack of executive leadership, not to any particular inherent design fl aw in strategy maps, scorecards or the four other strategy-focused organization principles. The failures occurred when staff groups or functional of cers introduced the scorecard with the acquiescence, but not the leadership and commitment, of the CEO of the business unit. And the purpose for introducing the balanced scorecard was not for effective strategy execution, but for more tactical reasons, such as to change the compensation system, to reinforce a quality management system or to change the reporting system to give managers more access to information about their operations. All of these goals are laudable but none, by itself, can transform and align an organization for effective strategy execution, the principal deliverable, as it turned out, for balanced scorecard implementations.
Future research studies of BSC implementations could certainly benefi t from measuring organizational leadership in each implementation and assessing this factor’s role in creating success. Several authors have done limited testing about the environments in which the balanced scorecard has succeeded or failed. Most of these studies were ad hoc correlations of non nancial and fi nancial variables. Few of the studies were informed by the concepts described in our writings on strategy-focused organization principles and the most recent work on integration of strategic planning and operational execution. The empirical evidence that Norton and I have seen and documented over the past 15 years identifi es leadership as the most important variable explaining successor failure. To state a bold hypothesis, leadership maybe both necessary and suffi cient for success. It is necessary since, without it, the balanced scorecard will be just another ad hoc reporting system, and the gains from embedding the balanced scorecard in a system for effective strategy execution will not be realized. Leadership is required to translate strategy into the linked strategic objectives on a strategy map and then to use the map and the accompanying scorecard interactively, as described in this chapter. The more challenging claim is that it is also suffi cient. This hypothesis emerges from the documented best practices, drawn from hundreds of successful implementations, on how to build and operate the new management system for strategy execution. Managers can apply this body of knowledge, which is referenced in this article, to implement the four strategy-focused organization principles other than leadership. But none of the four principles can be effectively mobilized and sustained without leadership at the top. Of course, such a strong claim about both necessity and suffi - ciency needs to be tested through careful research designs and instruments.
Research in leadership would start with measurement there could be multiple forms of effective leadership but some aspects maybe necessary or common across all leadership styles. Once leadership can be measured validly, then cross-sectional or longitudinal research can be performed to see its in uence on explaining variation in the results delivered from following the fi ve SFO principles.
Secondly, the emerging literature and practice on enterprise risk management needs to be more formally embedded in the strategy map and balanced scorecard. Many companies, especially fi nancial services companies, have already specifi ed risk management objectives in the scorecard’s fi nancial and process objectives. But these additions have been incremental and not part of an integrated risk management framework. Our generic strategy map template (see Fig. 2
) emphasizes two primary fi nan- cial sub-strategies, revenue growth and productivity, as the drivers of sustainable shareholder value creation. Surely, risk management must be introduced as a third pillar for
fi nancial performance, and perhaps an entirely new set

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of risk management processes should be included within the process perspective. Given the intense focus of companies around the world to improve their measurement and management of risk, we should expect important advances, over the next fi ve years, to embed risk management objectives more centrally into the strategy execution framework.
Thirdly, strategy maps still represent a highly- aggregated view of causal relationships among strategic objectives. In order to make strategy maps more visually appealing to managers and employees, we have simpli-
fi ed the causal relationships assumed within the strategy map (one might even describe the generic strategy map as a “ dumbed-down ” representation of causal linkages. Norton and I, both trained as electrical engineers, have been aware from the outset that systems dynamics techniques could help produce a more detailed model that links both strategic and operational objectives in a more elaborate mapping exercise. A detailed systems dynamics model would incorporate causal linkages that have estimates of magnitude and time delay, as well as more complex feedback loops than are presently visualized in the generic strategy map. For an example of such a quantifi ed linkage, analysts could estimate the percentage improvement in a lagging indicator that would be expected from, say, a 1% improvement in a leading indicator. The analysts would also estimate the time delay between a 1% improvement in a leading indicator and the expected response in a lagging indicator. And the causal linkages need not be uni-dimensional. The model could include multiple leading indicators and impacts that can be a combination of linear, multiplicative or even Boolean (no impact if the improvement is less than a given amount a jump in impact once a threshold level of improvement has been achieved.
The statistical and modelling capabilities for constructing models of detailed causal relationships already exist. And many companies, particularly those operating hundreds or thousands of relatively similar decentralized units, generate suffi cient data each month to estimate even complex models. The shortage seems to be how to marry analytic capabilities with companies that generate suffi cient data and have a senior management team capable of understanding and using the dynamic, causal models effectively to guide their strategies and operations.
Thus, while much has been learned over the past
15 years, much interesting research can still be done. And with many private, public sector and non-profi t enterprises around the world implementing new strategy execution systems based on the balanced scorecard framework, the opportunities for informed empirical research are great .

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